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2017 (11) TMI 1199

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..... isfied. We therefore need not examine the second condition regarding nature of the expenditure as the same would be purely academic in nature. The provisions of section 35E are therefore not applicable in the instant case. Therefore, the applicability of provisions of section 37(1) cannot be excluded merely on account of the fact that the expenditure is covered under section 35E of the Act. Given that the piece of land falls within the mining area in respect of which the assessee has an existing right to carry on its mining operations and the fact that the assessee wishes to carry on the mining area in that area, the assessee was required to pay compensation to the land owner so that the latter does not obstruct or challenge the carrying of the mining activity underneath the surface of land which belongs to him. The payment is for the purposes of removing the disability or obstruction and to facilitate the carrying on its business. No fresh rights have been acquired by the assessee by virtue of paying the said compensation. The assessee was already having a right to carry on the mining operations. The fact that land stand mutated in the name of the Government of Rajasthan post-s .....

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..... the disallowance of revenue expenditure of ₹ 18,00,000 under section 35(2AB) of Income-tax Act, 1961. The action of the learned Commissioner of Income-tax (Appeals) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing deduction of the said expenditure of ₹ 18,00,000. 2. At the outset, the learned authorised representative submitted that he does not wish to press ground Nos. 1a and 2 of the assessee's appeal. Hence the same are dismissed as not pressed. 3. In ground No. 1b, the assessee has challenged the action of the learned Commissioner of Income-tax (Appeals) in disallowing compensation amount paid to the land owner for using the land for mining under section 37(1) of the Act. 4. Briefly stated the facts of the case are that the assessee-company has shown assets worth ₹ 1,96,77,243 in its financial statements including addition of ₹ 35,00,000 made in the financial year relevant to the subject assessment year. The assessee-company has shown these assets under the head Mining Rights and claimed depreciation at 25 per cent. under section 32 of the Act. As per the Assessing Officer, t .....

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..... otal area allotted by the Government to the appellant for mining the soap stone. The appellant had in the past also made such payments to other persons for getting possession of the land in order to do the mining in the area. All the amount paid in the earlier years amounting to ₹ 1,61,77,243 was shown by the appellant as addition to land and no depreciation or any other deduction in respect of such payments were claimed by the appellant. However, in the assessment year 2013-14 (the assessment year under appeal), the appellant has claimed depreciation of ₹ 44,81,811 under section 32 on the ground that the amount paid by the appellant was intangible asset as defined under clause (b) of Explanation 3 to section 32. For ready reference the Explanation 3 is reproduced hereunder : '(b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.' Thus, it can be seen that intangible asset has been defined in the Act as being, know-how, patents, copyrights, trademarks, licences, franchises, or any other business or commercial rights of similar nature. I am of the consid .....

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..... e moneys realised by the assessee in respect of any property or rights brought into existence as a result of the expenditure. (3) Any expenditure- (i) on the acquisition of the site of the source of any mineral or group of associated minerals referred to in sub-section (2) or of any rights in or over such site ; (ii) on the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or over such deposits ; or (iii) of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of depreciation is admissible under section 32, shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-section (2).' A plain reading of clause (i) of sub-section (3) of section 35E makes it clear that any expenditure on acquisition of the site of source of any mineral or group of associated mineral or of any rights in or over such sight is not admissible as deduction. Therefore, in view of the specific provisions of section 35E, the claim of the appellant that it should be allowed the entire amount of ₹ 35 lakhs as deduction is found to be not .....

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..... ) that the amount of compensation paid by the assessee-company during the year amounting to ₹ 35,00,000 is to be allowed as revenue expenditure. The relevant clauses of the lease agreement were brought to the notice of the learned Commissioner of Income-tax (Appeals) in accordance with which the compensation was paid by the assessee to Shri Ranga during the year. 11. It was further submitted that the issue is squarely covered in favour of the assessee-company by the recent decision of the hon'ble jurisdictional High Court. When compensation is paid to land owners for mining on their piece of land, such compensation has been held by the hon'ble Rajasthan High Court, in the case of Deputy CIT v. Rajasthan State Mines and Minerals Ltd. (Appeal No. 651 of 2009 dated May 30, 2017) to be of revenue in nature. The hon'ble High Court dismissed the contention of the Department that by paying such compensation, the assessee acquired benefits of enduring nature and thus should be treated as capital expenditure. In this case, the hon'ble Rajasthan High Court adjudicated the below mentioned question of law, on appeal filed by the Department : Whether on the facts a .....

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..... the revenue. 13. It was further submitted that the learned Commissioner of Income-tax (Appeals) rejected the claim of the assessee-company by referring to sub- section (3) of section 35E, wherein it has been mentioned that any expenditure incurred by the assessee-company on the acquisition of the site of the source of any mineral or group of associated minerals or of any rights in or over such site, shall not be deemed to be an expenditure incurred by the assessee-company for the purpose specified in sub-section (2). It was submitted that the expenditure of ₹ 35,00,000 was incurred by the assessee-company on the compensation paid to the land owner for vacating land on which the assessee-company already had right of mining by virtue of the lease agreement entered with the Government of Rajas than. Such expenditure did not result into the assessee-company acquiring any site for mining nor did it get any additional right to use such site. Assessee-company already had the right to extract minerals and to do mining on the said land. Applicability of section 35E is driven by sub-section (2) of section 35, which includes, in its scope, expenditure incurred by any assesse .....

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..... of 309 ITR (AT) : We are unable to agree with the contention of the learned Departmental Representative that section 37 of the Act is not attracted to this extent because the same is covered between sections 30 and 36 of the Act specifically under section 35E of the Act. As stated above, section 35E(2) applies to the expenditure which has been incurred for the purpose of prospecting of the mineral and not for the purpose of commercial production of the mineral. We are of the considered view that in this case, section 37 would be clearly attracted since the expenditure is not of capital nature and is exclusively incurred for the purpose of business and not of personal nature. Removal of overburden for excavating the mineral i.e., lignite does not bring into any benefit of enduring nature or any asset into existence. Once the upper crust of earth known as overburden is removed that would go waste and lignite is excavated. No enduring benefit can be said to have arisen to the assessee by removal of such overburden. In any case, we further find that such expenditure was held to be allowable even during the assessment year 1980-81 while giving direction under section 144B of .....

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..... r of the company placed restriction on the company's borrowing powers and it placed restriction on voting rights of certain members. The company decided to petition for a supplementary charter providing for the vesting of the management in board of directors and for the removal of the limitation on the company's borrowing powers and restrictions on the issue and transfer of shares. The company's petition was contested by dissenting shareholders in the court. The company settled the litigation under which, it had to pay the cost of legal action and buy out the holdings of the dissenting shareholders and in pursuance thereof a supplementary charter was granted. In assessment proceedings, the company claimed deduction of payments made by it towards the cost of obtaining the charter, the amounts paid to the dissenting share holders and expenses in the action. The Special Commissioner held that the company was entitled to the deductions. On appeal the House of Lords held that since the object of the new Charter was to remove the obstacle to profitable trading, and the engagement of a competent manager and the removal of restrictions on borrowing facilitated the day-today tra .....

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..... e-tax (Appeals) has rightly invoked the provisions of section 35E and in view of that, the provisions of section 37(1) are not attracted in the instant case. He further relied upon the order of the lower authorities. 19. We have heard rival contentions, perused the material available on record and gone through the orders of the authorities below. The first issue under consideration is whether provisions of section 35E are attracted in the instant case and if the answer to the same is in the affirmative, the provisions of section 37(1) would then get excluded as the latter covers expenditure other than expenditure described in sections 30 to 36 of the Act. Secondly, where the answer is not in the affirmative, whether the provisions of section 37(1) are satisfied in the instant case and the assessee is eligible to claim the expenditure as revenue expenditure. Applicability of section 35E 20. The provisions of section 35E reads as under : 35E. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, is engaged in any operations relating to prospecting for, or extraction or production of, any mineral and incurs, after the .....

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..... y such mineral or group of associated minerals. The minerals and the groups of associated minerals for the purposes of this provision have been specified in a new Seventh Schedule inserted by section 58 of the Amending Act. 49. As in the case of preliminary expenses, amortisation in respect of expenditure on prospecting for, and development of, the specified minerals, will also be allowed only in the case of Indian companies and resident assessees other than companies. The benefit of amortisation will not be available to a foreign company even if such company declares its dividends in India, and regardless of the pattern of its shareholding. It will also not be available to non-resident taxpayers generally. 50. The expenditure to be amortised under section 35E will be the expenditure incurred under the specified heads after March 31, 1970, during a five year period ending with the 'year of commercial production', i.e., the previous year in which, as a result of any operation relating to prospecting commercial production of any one or more of the specified minerals or associated minerals commences. The term 'operation relating to prospecting' comprises oper .....

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..... succeeding previous years. Such carry over will be allowed only up to and including the 10th previous year as reckoned from the year of commercial production. If there is any unabsorbed amount at the end of the 10th year, it will lapse. 22. The above provisions thus provides for amortisation of expenditure on prospecting for any mineral or group of specified minerals or on the development of a mine or other natural deposit of any such mineral or group of associated minerals. Secondly, certain categories of expenditure have been excluded from the definition of eligible expenditure and the same are provided in sub-section (3) of section 35E. Thirdly, the expenditure to be amortised under section 35E will be the expenditure incurred under the specified heads during a five year period ending with the year of commencement of commercial production. For applicability of section 35E, the nature of expenditure and period of incurrence of such expenditure has to be satisfied cumulatively. Both the conditions are essential. In the instant case, the learned Commissioner of Income-tax (Appeals) has looked at the nature of expenditure and stated that though the provisions of section 35E are .....

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..... sidering the question having regard to the nature of business, its requirement and the nature of the advantage in commercial sense. In the instant case, the assessee had been granted mining lease in respect of 4.27 square miles at Jamsar under which he had right to sink, dig, drive, quarry and extract mineral, i.e., the gypsum, and in that process he had right to dig the surface of the entire area leased out to him. Clause 3 of the Part III of the lease, however, placed a restriction on his right to mining operations from the railway area, but that area could also be operated by it for mining purposes with the permission of the authorities. The assessee had, under the lease, acquired full right to carry on mining operations in the entire area including the railway area. Under clause 3 it could carry on mining operations only after obtaining the permission of the authorities which had been granted by the Railway authorities. The payment of ₹ 3 lakhs was not made by the assessee for the grant of permission to carry on mining operations within the railway area, instead the payment was made towards the cost of removing the construction which obstructed the mining operations. .....

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..... previous year, the assessee-company paid an amount of ₹ 35,00,000, to Mr. Ranga, S/o. Mr. Panchiya Meena. It is the contention of the authorised representative that the amount has been paid as compensation to the land owner. The area for which compensation was paid forms part of the area which has already been leased out by the Government of Rajasthan to the assessee-company and for which the assessee-company had the right to carry out mining operations. It was contended that as the existence of the landowner on such land had the potential of obstructing the mining operations, the assessee-company paid the compensation with a view to carry on its business activities smoothly and without any operational hindrances. It was further submitted that on payment of compensation, the landowner surrendered the land to the Government of Rajasthan and the land becomes exclusive property of the Government of Rajasthan and mutated in the name of Government of Rajasthan in the revenue records. It was accordingly submitted that the assessee-company did not acquire the said piece of land by way of any new asset and the amount was spent merely for the purposes of removing the obstruction to f .....

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